Aug 24, 2015 by Andrew Clark
Andrew R Clark, DVM, MBA
Veterinary School does not provide sufficient business training for veterinarians to manage their businesses well.
Recognizing this gap, Dr. Ed Blach and I built ismypracticehealthy.com (IMPH), a business education site for veterinarians. This site is designed for veterinarians who would like to manage their practices better but are not sure where to start. IMPH members have the opportunity to post questions related to managing their practices and Dr. Ed Blach and I post practical, no-nonsense responses to those questions.
“I want to manage my practice better. Where do I start?” When most veterinarians talk about managing their practices ‘better’ what they mean is managing their practices more profitably. Two variables impact profit, income and expenses. Profitability is a simple equation that looks like this:
income – expenses = profit
Income and expenses are affected by management practices. In most veterinary practices, other than raising prices, increasing income is a slow process. Reducing expenses however, can be implemented rapidly. The three great pillars supporting expense management and therefore profitability are:
- Compensation - often consumes 40 - 50% of gross income
- Inventory - often consumes 20 - 35% of gross income
- Financial statements - the only tools we have to measure profitability
In my opinion, the answer to ‘where do I start?’ is start with your financial statements. In my experience, very few veterinary practices have financial statements that accurately reflect the business activity and financial health of the practice. Financial statements are the only tools we have to measure profitability. Financial statements, or financial reports come in many forms. All report some aspect of the financial activities and financial position of a company. For example, your tax returns are simply financial statements designed to report activity to the Internal Revenue Service. Financial statements designed for analysis are referred to as ‘managerial accounting’ reports. Those are the reports that enable you to manage your practice effectively.
The Merck Schein National Equine Economic Study looked at 19 managerial accounting results that could be tracked in an effort to manage the financial health of a practice. There were only seven results that were tracked by 50% or more equine practices:
- 97% of practices track total revenue.
- 86% of practices track Total Expenses.
- 14% of practices cannot track profitability because they don’t track their expenses!
- 77% of practices track Accounts Receivable.
- 23% of practices do not track how much they are owed in accounts receivable!
- 75% of practices track Cost of Drugs and Medical Supplies.
- 25% of practices do not know how much they spend on their second largest expense category!
- 60% of practices track Product Revenue.
- 40% of practices cannot track profitability of product sales!
- 52% of practices track lab expenses while only 35% track lab revenue.
- 65% can’t tell whether or not their lab is profitable because they only track half of the equation!
- 52% of practices track individual veterinarian production.
- 48% don’t track how much veterinarians produce!
According to the study, if you want to begin managing your practice for improved profitability, the first step is to begin using the tools that are available to all of us, our financial reports. Ulitmately you will need a P&L or Income Statement, a Cash Flow Statement and a Balance Sheet. Don't worry if you only have a P&L in the beginning. Financial reports are really like lab results except they don’t come with normal values next to your results. Ask your book keeper to spend 30 minutes reviewing your financials after she/he compiles the reports. During that time she/he should be looking for 'exceptions', things that just don't look right. You begin your part of the bargain by spending 60 minutes monthly reviewing your financials as soon after the end of the month as your book keeper has them prepared. Keep in mind the exceptions your book keeper identified and see if you can make sense of each exception. If you can't, spend some time with your book keeper to see if together you can sort it out. As you review your financials over time, you will begin to understand your practice’s normal values and identify values you would like to see change. Thats when you begin to manage with an objective!.